A Week in the Rearview – week ending 8/20/2010
In the headlines
A look at some of the market movers from the week:
- Dell agreed to buy 3Par for $1.2 billion
- Potash Corp of Saskatchewan found itself on the defensive after a hostile takeover bid from BHP Billiton
- Warren Buffett tipped his investment cards in a recent SEC filing
- BP pledged oil sales in exchange for $5 billion in loans
- Bankruptcies are spiking in the U.S.
- General Motors filed paperwork for an initial public offering
- Germany’s Bundesbank raised its outlook for the country’s growth this year
- First Niagara Financial Group agreed to buy NewAlliance Bancshares for $1.5 billion
- The CBO expects this year’s budget deficit to top $1.3 trillion
- Eight banks were closed on Friday, brining the year’s total to 118
- State jobless rates showed mixed results
- Unemployment claims unexpectedly jumped
Commentary
Following the near 4% slump of the prior week, the market continued to skid this week with the S&P 500 finishing down 0.7%. Early week gains weren’t enough to offset the drop at the back end of the week and the slide took the S&P further into negative territory for the year. The index is now down 3.9% year-to-date.
Putting the pieces together for the week’s lackluster performance largely comes down to the economic reports. Ken Goldstein, an economist at The Conference Board, summed up investors’ concerns pretty succinctly when discussing The Conference Board’s leading indicators report. He said, “…the industrial core of the economy has moved to a slower pace. There appears to be no change in the pace of the service sector. Combined, the result is a weak economy with little forward momentum.”
Goldstein wasn’t without any silver lining though and added, “the good news is that the data do not point to a recession.” However, that supposed silver lining seems to have struck investors as a bit thin and did little to boost spirits at the end of the week.
While the leading indicators report likely contributed to the negative sentiment, investors seemed homed in on weekly unemployment claims and a manufacturing report from the Federal Reserve Bank of Philadelphia. The unemployment claims release was straightforward enough — new claims for the prior week clocked in at 500,000 an increase of 12,000 from the week before and 25,000 above the expected level.
The report from the Philly Fed is slightly more nuanced, but not much more encouraging. The bank’s Business Outlook Survey showed the current activity measure for manufacturers at its lowest level since July of 2009 and while expectations of growth over the next six months continued to be positive, the extent of the optimism notably waned. At the same time, employment measures for the region also softened considerably.
The Philly Fed report seemed to trump a report earlier in the week from the main Federal Reserve Bank that indicated a better-than-expected 1% increase in U.S. industrial production in July. Production of finished products led the push with 1.3% growth, prodded on by a 1.8% bump in business equipment. In addition, industrial capacity utilization increased from the prior month.
Of course while investors seemed to give the week’s economic reports a thumbs down, many corporate managers may have spent the week showing that they’re getting more comfortable with the outlook for the future. Merger and acquisition activity picked up noticeably during the week with deals such as Intel’s $7.7 billion buyout of McAfee, First Niagara’s NewAlliance buy, and BHP’s massive $39 billion hostile bid for Potash Corp.
Looking ahead
Coming off the past week’s end-of-week slump, the market will have its work cut out trying to climb back into positive territory. The economic calendar is light in the upcoming week, but it still contains a few reports that could be set to further spur pessimism. In the first part of the week both new and existing home sales will be reported and both have the potential to disappoint as the real estate sector continues to face intense pressure.
On Friday, the second estimate of second quarter GDP will be released and it’s expected to show that growth in the June quarter was just 1.4% as compared to the 2.4% in the initial estimate. Meanwhile, the University of Michigan’s consumer sentiment gauge for August is expected to edge down slightly.
On the flip side, durable goods orders may show a gain of more than 3% for July while the market is looking for initial unemployment claims to ease back down from last week’s 500,000 level. And certainly if any of the potentially disappointing reports surprise to the upside, that could also help turn the sentiment tide.
Earnings will continue to shuffle along next week, but it seems very likely that investors will have their attentions fully focused on the economy.
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